Bitcoin: a mobile money alternative

Bitcoin exchanges, such Intersango, see Africa as a potential growth story for the virtual currency.

Virtual currency Bitcoin could be an alternative to mobile phone payment systems in Africa, such as M-Pesa, say experts.

Bitcoin transactions occur when a buyer uses software to encrypt a specific number of virtual coins with a code. The buyer then affiliates that code with a seller's public key or “address”, and once a transaction occurs, the software broadcasts to the Bitcoin network that the particular amount of coins are owned by the seller.

Africa, in particular, presents potential opportunities for Bitcoin exchanges, as the mobile money market on the continent has taken off. Pyramid Research, for example, forecasts that the continent's mobile money market is to exceed $200 billion in 2015.

Bitcoins do have advantages over mobile money. The virtual currency can be traded across international borders, while mobile payment systems are limited to money transfers within countries and, at best, regions. Furthermore, mobile payment systems are tied down to telcos or banks, while Bitcoins work on a decentralised model.

Patrick Strateman, co-founder of the world's second biggest Bitcoin exchange, Intersango, says smartphone applications could be developed to enable transfers of the virtual currency between people in Africa, while mobile text or SMS exchanges could also be set up on the continent.

“It's definitely something that could work,” says Strateman. “There's a significant amount of work to be done between where we are now and everybody using it, but that's really a question of somebody putting out the effort to do that.”

Hannes van Rensburg, chief executive of enterprise mobile financial services company Fundamo, says there is nothing stopping Africans from using Bitcoin as a form of trade already. A buyer, for instance, could technically send an SMS of the details of an encrypted Bitcoin key code for a specific amount of units to a seller using the virtual currency software and network.

“Technology is not the big thing; it is whether people will trust the payment,” Van Rensburg says.

Gaining trust in using a digital currency that has no single accountable body or stakeholder is a major obstacle for Bitcoin exchanges seeking to attract Africans who have entrusted telcos or banks with their mobile money transfers.

Moreover, Bitcoin exchanges have experienced rocky times in recent months, resulting in the currency's volatility. Popular exchange Mt Gox was hacked last year, and last month the world's previously second-biggest Bitcoin exchange, TradeHill, closed down. The price of one Bitcoin crashed from its peak of $30 last year to its value of almost $5 today.

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E-money specialist Jon Matonis does, however, say that Bitcoins are safe to use, despite exchanges such as Mt Gox having had its security compromised.

“The cryptography is sound, as it is based on cryptographic primitives that have been peer-reviewed and tested.

“The current weak area for safety is in how individuals choose to store and protect their Bitcoin balance. Encrypting locally on your hard drive is good, but choose a strong password; storing offline and encrypted is what I prefer, because it is safer,” he says.

He further adds that “Africa offers a test bed for some Bitcoin business models that might actually flourish”.

The conditions could be right in Africa for this to occur, because reliance on traditional banking infrastructure is weak and mobile phone usage is high, he notes.

“Add the fact that Bitcoin can preserve value better than the Zimbabwe dollar and you have a great set of conditions that don't really exist elsewhere.”